BIR Ruling [DA-177-06]

March 27, 2006 BIR RULING [DA-177-06] P.D. No. 1354; DA-340-2003 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10- Tower 6815 Ayala Avenue cor. H.V. dela Costa St., Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated April 12, 2005 requesting in behalf of your client, Ace Tubular Services, Ltd. Philippine Branch for a confirmation of your opinion that a subcontractor engaged in geothermal operations in the Philippines is subject to final income tax equivalent to 8% of its gross income derived from its contract with PNOC Energy Development Corporation (PNOC-EDC). It is represented that Ace Tubular Services, Ltd. Philippine Branch (ACE) is a branch office duly licensed to transact business in the Philippines with Securities and Exchange Commission under SEC Registration No. FS200417780, with business address at TESCO Bldg., R.M.T. Industrial Com., Tunasan, Muntinlupa City; that it is primarily engaged in the business of providing specialized services such as supplies, inspection, field repair, and maintenance for all kinds of tubulars, drilling tools and other down hole equipment used in the drilling and production of Oil, Gas and Geothermal wells; that your client was engaged by PNOC-EDC for its geothermal well drilling program; that to formalize the same, your client and PNOC-EDC intend to enter into a contract whereby the former will carry out the said geothermal well-drilling program of the latter; and that you invoke Section 4(d) of P.D. No. 1442, otherwise known as the Act to Promote the Exploration and Development of Geothermal Resources, in relation to Section 12(a) of P.D. No. 87 also known as the Oil Exploration and Development Act, and P.D. No. 1354, imposing final tax on subcontractors engaged in petroleum operations. In reply, please be informed that Section 12(a) of Presidential Decree No. 87 dated December 31, 1972, known as "An Amended Act to Promote the Discovery and Production of Indigenous Petroleum and Appropriate Funds Therefor", provides as follows: "SEC. 12. Privileges of Contractor . The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the contractor shall have the following privileges: (a) Exemption from all taxes except income tax. (b) . . . ." On the other hand, Presidential Decree No. 1354, known as "An Act Imposing Final Income Tax on subcontractors and alien employees of service contractors and subcontractors engaged in petroleum operations in the Philippines under Presidential Decree No. 87", provides as follows: "Section 1. Tax on subcontractors . Every subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local: Provided, however, that any income received from all other sources within and without the Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign subcontractors shall be subject to the regular income tax under the National Internal Revenue Code. The term "gross income means all income earned or received as a result of the contract entered into by the subcontractor with a service contractor engaged in petroleum operations in the Philippines under Presidential Decree No. 87." IN FINE, this Office hereby confirms your opinion that since Ace Tubular Services, Ltd. Philippine Branch is a subcontractor engaged in the business of providing specialized services such as supplies, inspection, field, repair, and maintenance for all kinds of tubulars, drilling tolls and other down hole equipment used in the drilling and production of Oil, Gas and Geothermal wells, its operations in the Philippines is subject to final income tax equivalent to 8% of its gross income derived from its contract with PNOC Energy Development Corporation (PNOC-EDC). However, any income received from other sources shall be subject to the regular income tax under the National Internal Revenue Code, pursuant to the afore-quoted provision of Presidential Decree No. 1354. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC Head Revenue Executive Assistant Legal Service